Archive for the ‘Banks’ Category

Earlier this month Wells Fargo admitted that its employees created thousands of bogus credit card accounts to meet sales goals. This led to bonuses for many employees including high level ones. Wells Fargo fired over 5,000 employees for their involvement in the scandal.

The Wells Fargo scandal is inexcusable and heads should roll at the bank’s highest levels. At the same time it is amusing to read Elizabeth Warren’s scolding of Wells Fargo’s CEO John Stumpf’s “gutless leadership” for his pushing responsibility for the scandal onto lower-level employees. As an associate said of Warren’s double standard:

“I’m not defending this guy by any means, but I wonder if Elizabeth Warren told Hillary she is a gutless leader when she blamed her email issues and subsequent attempts at cover-up on her low-level employees. Something tells me I already know the answer…. “

Wells Fargo Chief Accused of ‘Gutless Leadership’

The chief of Wells Fargo, John G. Stumpf, appeared before the Senate Banking Committee. He apologized. He expressed regret. He vowed to make amends.

But the senators were not having any of it. And the more he tried to explain, the more skeptical they became.

Senator Elizabeth Warren even suggested he resign, saying that his pushing responsibility onto low-level employees showed a “gutless leadership.” On the issue of clawing back pay, Mr. Stumpf said it was a process that he could not get involved in.

The greatest economic calamity of contemporary time occurred in 2008. While there were complex issues behind the economic meltdown, main culprit was an overvalued housing market that became a bubble. When housing valuations began to fall, the bubble popped, the catalyst for the overall economic meltdown.

The housing bubble did not occur by chance or natural economic activity. The fuel that fed this fire included:

Irresponsible Federal Reserve monetary policy that left interest rates too low for too long. This not only helped promote cheaper mortgages, but also cajoled investors into investing in mortgage-backed securities, seeking yield in very products.

Inappropriate lending practices were forced on commercial banks by the government in its pursuit of a social agenda, which included the Community Reinvestment Act of 1977. Through Fannie Mae and Freddie Mac, the government forced banks to lower lending standards so that individuals who could not afford mortgages received them.

The government also has an in incestuous relationship with banks. For example, it created legislation enabling commercial banks to become involved with very risky financial products that risked systemic damage to the economy; i.e. repeal of the Glass-Steagall Act late in the Clinton administration, In addition, the Commodity Futures Modernization Act of 2000 allowed banks to become involved in the ultra-high-risk derivatives market.

Most economists agree that actions of the Fed, government legislation and banker greed were responsible for creating the housing bubble and subsequent banking crisis. Significant lip-service was offered by politicians for corrective action, including the massive Dodd-Frank legislation of 2010. However, this legislation is causing more problems in the banking system. The crisis was caused by banks supposedly being too big to fail. With Dodd-Frank, the largest banks have gotten bigger.

The 2008 economic meltdown brought on a liquidity crisis that threatened the world’s banking system. Central banks and governments used massive interventions and stimulative policies to offset the crisis. These policies may initially have been successful in staving calamity, but have since lost effectiveness. Eight years later while central bank interest rates remain near zero, economic growth is anemic. This prolonged economic stagnation i a major reason behind growing social disorder in many countries.

Given the scope of the economic damage, it is telling that not one banker has been indicted or imprisoned for unethical behavior. In addition, bank executives who were enriched during the bubble years have not had to make any restitution. The incestuous relationship between bankers, governments and central banks make such punishment unlikely.

To appease the masses, politicians have created the illusion of corrective action. This includes the above-mentioned Dodd-Frank Act. In addition, the Justice Department creates an illusion of bank retribution by levying massive fines on large bank. According to an Andy Koenig’s Wall Street Journal op-ed titled Look Who’s Getting That Bank Settlement Cash, these payments include:

$5.1 billion settlement with Goldman Sachs

$3.2 billion settlement with Morgan Stanley

$7 billion with Citigroup

$13 billion with J.P. Morgan Chase

$16.65 billion Bank of America

While the settlements might make it seem like the greed and poor business practices have been addressed, reality is different. First, the banks involved were bailed out by the US government through the TARP program. One could make the argument that the penalties were actually inflicted on the US taxpayers who funded TARP. In addition, the penalties on the banks affected earnings and shareholders long after the perpetrators of the actions received large bonuses, none of which was returned.

Koenig points to another troubling aspect of the government’s bank “retribution” program. None of the collected funds have gone to those damaged by the bank’s behavior. Instead, the Justice Department forces the banks to give the funds to nonprofit organizations drawn from a federal government approved list. This includes some such as Catholic Charities that are typically nonpolitical. However, it also includes La Raza, the National Urban League, and the National Community Reinvestment Coalition who are known to have Progressive political agendas that include voter registration programs, community organizing and significant lobbying efforts. This is but a political shakedown, an abuse of power that does not offer redress to or appropriate punishment to those responsible for the problems.

Those on the Left of the political aisle seem satisfied with the federal government’s role in distributing fines from banks, as a majority back causes they agree with. However, this is a slippery slope that one day will benefit the opposite political causes.

Conservatives have also been acquiescent to the government’s movement of money from banks to political and social causes. This demonstrates that the political elites are more concerned with consolidating power in Washington than following the rule of law or the Constitution.

The more power collected in Washington the greater will be the abuse of power.

The Wall Street Journalreported that mega-bank, Bank of America, has agreed to pay a $17 billion fine for its role in the mortgage crisis that led to the 2008 financial meltdown. This is only a piece of the nearly $60 billion the bank paid during the last five years to settle legal problems.

Those who cheer the huge Bank of America fine are missing the larger picture. Certainly many banks used dubious tactics and business practices that help lead to the 2008 economic meltdown. However, willing partners included the US government that pressured banks into giving mortgages to individuals who could not afford them, and the Federal Reserve whose easy money policies were major factors in creating the housing bubble. These issues, along with banker greed and borrowers, were significant factors in creating the bubble and subsequent meltdown.

How did the government respond to those largely responsible for creating economic calamity? First they bailed out large banks and other companies. Then they bailed out some individuals who borrowed too much money.

Perhaps the biggest problem relating to the huge monetary settlements between large banks and the Department of Justice is that the penalties are not placed on the perpetrators of wrongdoing. No executive or bank employee has been charged criminally by the DOJ. This is not by accident. Further, the current fines will be paid by shareholders including pension funds who had nothing to do with creating the problem.

The Department of Justice understands the misplaced logic behind the large penalties imposed on banks today. However, this populist action not only protects those in the private sector responsible for the bad behavior, but deflects attention from the government’s own role in creating the economic problems.

The European Union’s first bailout attempt of Cyprus was a dismal failure. That plan included a tax on all bank deposits that was rejected by the Cypriot Parliament. A more recent deal scraps the tax on depositors, but will still include losses for depositors and bondholders.

Cyprus’s largest bank, Laiki Bank, will be wound down with major bondholders taking losses. In addition, depositors with over €100,000 will be penalized. Some of Laiki Bank’s debt will be moved over to the Bank of Cyprus, the country’s largest lender, which will survive after the bailout. However, many Bank of Cyprus depositors facing losses over 50% of their assets. Since this will not be a tax it does not require Cypriot parliamentary approval.

Cyprus is a meager part of the European Union’s GDP, less than 1% with less than 1 million residents. The banking crisis became a much larger problem for Europe for two reasons. First, Cypriot banks became haven for foreign investors, mainly Russian making its banks eight times larger than the entire economic output of Cyprus. In addition, as part of the European Union, allowing it to implode risk contagion to other peripheral EU countries. Finally, it should be noted that the Cypriot banks took huge losses and became insolvent because of its holdings of Greek sovereign bonds, another EU basket-case.

While Cyprus’s is an insignificant piece of the European Union’s economy, the way the crisis has been “resolved” will likely lead to huge consequences for Europe going forward. Unlike in other EU bailouts, Cypriot depositors were forced to take haircuts on deposits. This brings into question an issue not raised in Western banks since the Great Depression; the safety of deposits. If the issue is contained to Cyprus, it will be insignificant. However, it is only a matter of time before depositors in other weak European countries become concerned about the safety of their bank deposits. This will lead to a run on those banks. Prime candidates are Italy and Spain, countries that are indeed “too big to fail”, but at the same time the EU does not have the assets to bail them out.

The bailout of Cyprus is reported to cost the EU less than $10 billion. Given this relatively small amount as compared to the total European Union GDP, why have they risked so much for the future of the larger EU banking system? The answer is political. Germans voters are wary of the bailouts of weaker neighbors and Andrea Merkel’s party faces an election. This tough approach to Cyprus is designed to mollify German voters. However, in the long run it places much more at risk for European unity.

Another interesting question is why the fiscally conservative Germany remains part of the European Union with its many weaker and fiscally irresponsible partner countries. The answer is self-interest. Germany is much more efficient than its southern partners. In previous years these countries could have lowered the value of their currency to become competitive against Germany. With the creation of the Euro, the cost of products from these inefficient countries has risen compared to Germany’s products. Is not surprising, therefore, that while Spain’s unemployment rate is currently 25%, Germany is a mere 6%. While the cost of the bailouts for Germany is high, the cost of dissolving the European Union would be even higher.

With the template of the Cypriot bailout in place, the EU has made it policy that under some circumstances it will demand member states seize depositor assets as a price for bailing out its banks. The message for depositors in European peripheral countries is clear; should banks in your country become financially at risk, your deposits will also become at risk. Human nature demands action of these depositors. Depositor funds will move from weaker countries to stronger ones, thereby exasperating the already existing financial strain on weaker European countries’ banks. This has the makings of Europe’s next banking crisis and it will be the result of self-inflicted wounds.

Yesterday we posted Cyprus Bailout Taxes Bank Deposits that reviewed the proposed bailout of Cypriot banks by the European Union. The entire banking system in Cyprus is insolvent and requires a bailout from the European Union, which means from Germany. Germany has a case of bailout fatigue after the bailouts of Ireland, Greece and Portugal. Prior to agreeing to the proposed Cypriot bailout, the EU placed some unique demands on Cypriot bank depositors in the form of taxing the deposits.

Today the Cypriot Parliament not surprisingly rejected the bailout plan with not one politician voting in favor of it. Even if taxing bank deposits was reasonable, no politician could survive in a democracy by agreeing to such terms.

The European Union and its Central Bank should have understood the political realities of their proposed Cypriot bailout, but instead with arrogance proposed a plan that could not be approved by the government. There is a more dangerous aspect to this error than merely bad judgment. Should depositors in other European banks fear for the safety of their deposits, contagion could result in runs on banks far outside of Cyprus. Should that type of panic begin it is hard to determine where will end.

It would not be surprising to see upward pressure on the price of gold as a result of the Cypriot bailout fiasco.

CNNMoney has reported on a giant stettlement between HSBC bank and the United States government. According to the report, HSBC will pay a fine of $1.92 billion for infractions that include money laundering for drug cartels and violation of other US laws for doing business with the likes of rouge nations Iran and Libya.

The DOJ/HSBC settlement adds to a growing list of banks that have paid fines relating to illegal banking activities. This includes:

Standard Chartered – Paid over $320 million to settle similar money laundering charges.

Credit Suisse – paid over $530 million concerning its business with Iran and others.

While $1.92 billion settlement is large, it is only a bit more than 10% of HSBC’s 2011 total profits. In announcing the HSBC settlement, N.Y. Assistant Attorney General Lanny Breuer said: “HSBC is being held accountable for stunning failures of oversight. The record of dysfunction that prevailed at HSBC for many years was astonishing.” This suggestion is nonsense. The perpetrators of the illegal acts are not being held accountable. While the HSBC shareholders pay a rather trivial fine, the individuals who broke US laws are neither being personally fined nor criminally prosecuted. Until such appropriate criminal actions are taken, executives of these banks will continue to flaunt American law

There is an incestuous relationship between governments and large international banks. When the 2008 financial crisis hit, the American government and others justified bailing out mega banks with the claim that “they are too big to fail.” The implication was that should these banks fail, greater economic calamities will result for society. This logic must be questioned given the fact that those large banks have been allowed to become substantially larger in the past four years. The government’s more recent settlements with the same large banks over illegal practices support this incestuous theory.

During the late summer of 2008, the financial markets were unraveling. Lehman Brothers failed, which precipitated general panic in the markets and the potential failure of other large financial institutions. When the panic hit jumbo worldwide insurer AIG based out of New York, the government blinked with an over hundred billion dollar bailout. This bailout was justified with the logic that should AIG fail, it would wreck havoc on the entire world’ s financial markets. Thus, we had the concept of “too big to fail”.

It is impossible in hindsight to determine if AIG were allowed to fail we would have had the threatened financial Armageddon. However, it is inarguable that the AIG bailout, as well as that of other firms, benefited some individuals and corporations at the expense of others. Since the bailouts, we have had the weakest recovery from a recession of modern times. It is likely that the bailouts and ongoing poor shape of the economy are connected.

The panic and financial markets’ turmoil played huge roles in the election of Barack Obama to the presidency, as well as giving Democrats large majorities in both houses of Congress. With the mandate, Democrats set out to implement changes in our financial system that would purportedly eliminate future financial crisis. The result was the infamous Dodd–Frank Bill with far-reaching implications to the financial world.

Ex-Citigroup CEO, Sandy Weil, was responsible for making Citigroup a large mega bank through mergers and acquisitions. This week Weil came out against allowing these large banks to continue in their current state and recommended that they be broken up, separating their brokerage businesses from regular commercial banking functions. In explaining his position Weil indicated that this back to the future approach would eliminate future risk to taxpayers of bailouts since no bank would be then too big to fail.

After Sandy Weil went public with his position, CNBC reporter Maria Bartiromo interviewed Congressman Barney Frank, Democrat from Massachusetts who was one of the co-authors of the Dodd-Frank Bill. She correctly raised weaknesses of the Bill including the fact that more than two years after its passage, important rules relating to the Bill are yet to be written. Instead of addressing the Bartiromo’s questions, Frank became defensive and obnoxious, as evidenced in the video.

Barney Frank is the same Congressman that refused to place more controls on Fannie Mae and Freddie Mac during the bubble years. He was famously quoted then saying that these government-backed corporations were financially solid and needed no further government oversight. After the bubble popped these corporations needed billions in taxpayer bailouts and will likely require more. Add to this Frank’s performance in the video below and it is easy to understand why Washington’s interference in the economy typically makes bad situations worse.

This morning’s financial news from Europe included an item that Spanish banks would require nearly $80 billion (US) to shore up their capital bases. However, that was just the start of a bad day that saw the Dow Jones Industrial Average have its largest one-day drop of the year, 250 points.

After US equities markets closed, the news got worse with Moody’s Investors Service issuingdowngrades to 15 large banks credit ratings with the largest hits being taken by giants Citigroup and Bank of America. The two notch downgrade to these banks place then just two levels above the junk category. In addition, Moody’s downgraded to a lesser extent the ratings of 13 other banks including Morgan Stanley, JPMorgan Chase, Goldman Sachs, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, BNP Paribas, Credit Agricole, Societe Generale, Royal Bank of Canada, and Royal Bank of Scotland. In other words, Moody’s is expressing concerns about a large portion of the West’s banking system.

In announcing the downgrades, Moody’s explained that: “The risks of this industry became apparent in the financial crisis. These new ratings capture those risks.” The downgrades are more than a black eye to these banks as the move could further damage them should customers decide to move investments to higher-rated banks creating a negative feedback loop. In addition, the downgrades may raise the cost of borrowing for the banks further straining their already financial conditions.

As this Blog has proffered since the early days of financial crisis, a problem of excess debt cannot be solved by still more debt. However, this is precisely the strategy that Western governments including that of the United States have taken since the 2008 meltdown. Moody’s downgrades of today were therefore predictable. It is also very predictable that more downgrades are to come.

Progressive governments worldwide have overspent for years on nonproductive programs including massive entitlements. The reckless spending was financed by borrowing from future revenue potentials, a Ponzi scheme perpetuated by various bubbles fed by government interventions including artificially low interest rates. Instead of allowing the growing economic imbalances to rebalance themselves in the market, governments continued and continue treating symptoms with still larger interventions creating even greater market imbalances. The results of this ill advised strategy include the crises now occurring in European banks, European sovereign debt problems, today’s US and worldwide bank downgrades and the exploding US debt.

While the world jumps from crisis to crisis in increasing frequency, it is not possible to determine when it will hit a tipping point. Generally, market inequities and imbalances can continue longer than logic would deem possible, especially when governments work together at interventions. However, in the long run, the laws of the market, i.e. supply and demand, are infallible and will have their day.

Yesterday, US Attorney General Eric Holder announced the Department of Justice’s settlement with Bank of America over an issue involving its Countrywide Financial division. The lawsuit involved allegations that Countrywide’s mortgage practices led to increased costs for customers from the African-American and Hispanic communities.

In his announcement, Holder stated that Bank of America will pay $335 million to settle the allegations. While this settlement makes for great press in time when banks are an easy target, it settles very little. If Countrywide was guilty of discriminatory lending practices, then criminal laws were broken, yet no executive from Countrywide has been charged with a crime or is being prosecuted. In fact, Attorney General Holder went out of his way in his announcement to not accuse Countrywide of criminal behavior when he made the statement below, emphasis added:

“… We resolved the government’s allegations that Countrywide and its subsidiaries – which are now owned by Bank of America – engaged in discriminatory mortgage lending practices…. These discriminatory acts allegedly included widespread violations…. These allegations represent alarming conduct….”

Countrywide was an independent company until purchased by Bank of America in August of 2007 when it was already in deep financial trouble. The crimes that were committed relating to the settlement occurred prior to the acquisition by Bank of America. The people responsible for the crimes have long since departed Countrywide after earning millions. It is also ironic that the $335 million penalty paid for by shareholders of Bank of America, not those of Countrywide. Couple this with the fact that no Countrywide executives is being prosecuted shows that justice is not being served by the settlement. This miscarriage of justice does little to stop similar illegal corporate behavior in the future.

Prior to being purchasing by Bank of America, Countrywide gave special mortgage rates to politicians and other connected Washingtonians including former Senator Thomas Dodd. Incredibly, it was Dodd along with Barney Frank that helped write the new financial regulations that large banks now are supposed to be following. That just doesn’t pass the smell test.

Eric Holder has proven to be an ineffective and incompetent Attorney General. However, the Department of Justice’s lame settlements with large corporations have been ongoing long before Holder became AG. The Attorney General position long ago became politicized. This, along with the incestuous relationship between big government, big corporations, and big labor, guarantees that the wealthy and powerful will not be taken to task for illegal behavior perpetrated on society.

President Obama’s class warfare rhetoric concerning profits and the wealthy deflects from the real issues facing the Country. Profits themselves are not the problem. The problems are illegal corporate behavior and the incestuous relationship between the powerful and Washington that may lead to increased profits. Obama ignores these issues since they would get too close to home for many in the Administration and their political buddies in Congress. So much for hope and change.

Federal Deposit Insurance Corporation (FDIC) released a report on U.S. banks earnings that indicates overall profit levels are the highest they have been in four years. While the government may trumpet this as a sign that their interventions and bailouts have succeeded, a broader look says otherwise. Here are some of the figures released:

The banking industry earned $35 billion in the last quarter, up from $24 billion in last year’s Q3.

The FDIC currently considers about 11% of U.S. banks as financially problematic, marginally down for the same period last year.

The very large banks made the bulk of the earnings increase.

These very large banks accounted for about $30 billion of the industry’s $35 billion in earnings for the third quarter.

The FDIC’s fugues are telling and indicate that the very large banks like Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, the very banks bailed out by the U.S. taxpayers, are now making most of the banking profits. In addition, these banks are not making the profits by lending money in the quantity needed, but rather by taking nearly interest free money from the government and then loaning that money back to the government at a huge profit. Ludicrous.

It has become evident through hindsight that the bailouts of the large banks benefited the banks themselves, not the overall economy. A question remaining is whether the bailouts were the result of mistaken policy or the government’s purposeful attempt to assist fellow elitists in the banking industry.